At the International Builders Show in Orlando, Florida, Federal Reserve Chairman Ben Bernanke lamented the difficulty of creditworthy households and potential home buyers finding the credit they want.

The Fed chairman mentioned many reasons for this dearth of credit: Representatives and warranties were high on the list. Contractual commitments from originators to ensure the quality of the loan have the unintended consequence of reducing riskier loans. No one should be surprised, then, that fewer lenders are offering mortgages to borrowers with a FICO score of less than 620 and a down payment of 10%, even though such loans are within Fannie Mae's and Freddie Mac's guidelines. Actions have consequences: raising costs to lenders make lenders more risk adverse.

Mr. Bernanke also said something that we thought was particularly noteworthy: "Learning from our experience with securitizations over the past decade, lenders and regulators alike should look carefully at rules and practices that may unduly diminish the origination of prudently underwritten mortgages.

”Securitization is a very import source of mortgage liquidity. To increase liquidity, we suggest that the Fed change its own policy and let mortgage rates rise to attract more private securitization, thus creating a more diverse, more vibrant lending market. Rising rates would also mean more borrowers would be motivated to act today, instead of waiting – as they have been conditioned – for lower rates.

Courtesy of Jessica Regan.

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